Archive for ND&S Updates

Happy Days Are Here Again

May 28, 2013 


Rarely have we had such a pleasant way to begin a work week after a three day weekend than today.  Consider the good news: consumer confidence jumped up on the Conference Board Report from 69 to 76.  This is well above the experts’ forecast of 71-72.  The real superstar number was home prices jumping 10.9% versus a year ago. (Of course if you are a first time buyer you‘re not thrilled by the news.)

Separately we learned that Texas home prices hit a new all-time high.  Many cities do still have a ways to go to get back to their old highs. Prices nationally are about 29% below the July 2006 peak.

Two of the factors influencing the improvement are job gains and near-record low mortgage rates.  Important to the supply-demand equation is a slower pace of homeowners putting their house on the market.  The supply of available homes did jump in April, but remains 14% below its year ago level.  The reemergence of “flippers” in the market is also having an impact.  We have heard of real buyers being outbid by these flippers.

In sum, the housing improvement is having a significant effect on the economy and the stock market.  Today will be the twentieth consecutive up Tuesday for stocks.  Enjoy it, but remain vigilant when the news is all good.

“Happy days are here again
The skies above are clear again
Let us sing a song of cheer again
Happy days are here again”

-Jack Yellen

Purchasing Power

May 20, 2013 


Last week stocks continued their advance with the DJIA gaining 1.6% and the S&P 500 2.1% supported by better than expected consumer confidence readings on Friday. Since consumer spending represents about 70% of U.S. GDP this is a key indicator for continued economic growth. Also, last week CPI numbers were released and inflation continues to be tame with prices up from a year earlier by 1.1% well under the Fed’s target of 2%.

However, rates on the 10 year Treasury hit 1.95% on Friday as some Fed officials publicly start to question when and how to end the Fed’s program of quantitative easing. The Fed’s program of purchasing $85 billion a month in mortgages has helped the housing industry and home prices. The timing and the speed of any reduction in easing by the Fed will be crucial in its impact on stock and bond prices. Hopefully the fed will time it perfectly just as the economy is on a sustainable growth path.

Today’s history – 1932 Amelia Earhart leaves Newfoundland as the 1st woman to fly solo across the Atlantic.
“Never interrupt someone doing what you said couldn’t be done.”
– Amelia Earhart

Inflation’s Steady Toll

May 13, 2013 


Discussions have been increasing about stocks being overvalued. It is true that last week the U.S. equity markets hit another record high, but that was not on an inflation adjusted basis. We see this as encouraging given stocks tend to beat inflation by a wide margin over time, especially when you reinvest dividends. According to Yale University finance professor Robert Shiller, the S&P 500 hit its all-time high in early 2000. To surpass this previous peak on an inflation adjusted basis, the S&P 500 would have to appreciate another 20+ percent to 2,000 versus Friday’s closing price of 1,634 (See chart below).

From another perspective, rising stock prices seem to be thawing out the initial public offering market. Year-to-date 64 companies have become publicly traded enabling them to raise $16.8 billion.  This is an increase over last year-to-date but is well below the peak in the 1990s. More IPOs show investor confidence in the equity markets and the economy. This in turn gives companies the funding access required to grow their businesses, and, in turn, their stock prices.

“No matter how good you get you can always get better and that’s the exciting part.”
– Tiger Woods

Record Highs…

May 6, 2013 


The S&P 500 hit yet another all-time high last week on better-than-expected U.S. jobs data and global monetary news.

The S&P 500 closed higher by 2% last week to close at 1,614.42.  Likewise, the Dow Jones Industrial Average gained 1.8% for the week to close at a record high of 14,973.96.  The NASDAQ, far from its record high, moved ahead 3.1% for the week to finish at 3,378.63.  The push higher last week was prompted by better-than-expected data as April non-farm payrolls came in at 165k with expectations of 140k.  The European Central Bank provided further good news as the ECB cut interest rates by 0.25% along with commentary indicating a willingness to provide more stimulus, if needed.

Bonds traded lower last week as yields rose in response to U.S. jobs data and ECB monetary actions.  The benchmark 10-year treasury closed the week at a yield of 1.73%.  The Barclays Aggregate Bond Index is now up 0.62% for the year-to-date period.

Market valuations are no longer a bargain at 15.4x trailing EPS of $105 (2Q12-1Q13).  We see the markets as more-or-less fairly valued.  Despite valuations, we continue to favor equities as we do not see any other assets that we like better than equities.  We would not be surprised to see the market trade sideways or lower for the next few months as is typical for this time of year (see chart below).

“In the business world, the rearview mirror is always clearer than the windshield.”

– Warren Buffett